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Could we have handled the truth?

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Bob Moon: Where do you draw the line between “break it to me gently,” or being intentionally misleading? That’s the question raised in an audit released this morning by the government overseer of the federal bailout program. He previously said we’re not likely to see all our TARP money again. And now Neil Barofsky says top officials weren’t leveling with the public about the health of some of the nation’s biggest banks when they pitched their bailout plan last year. Here’s Marketplace’s Steve Henn in Washington.

STEVE HENN: When Treasury Secretary Hank Paulson announced that the federal government was going to buy a stake in America’s biggest banks last year, he did it reluctantly.

Nine big banks got a total of $125 billion. And Paulson, Fed Chairman Ben Bernanke, even President Bush offered the same rational.

PRESIDENT Bush: This new capital will help healthy banks continue making loans to businesses and consumers.

Healthy banks — healthy was the operative word. But according to the government watchdog examining the bailout, it just wasn’t true. Some of these banks weren’t healthy, and officials at the Fed and Treasury knew that.

SIMON JOHNSON: A friend of mine actually said to me this morning, quote “I don’t trust the Fed anymore.”

Simon Johnson is an economist at MIT:

JOHNSON: I think that’s bad. You want people in the markets to believe the Fed.

If they don’t, in the long run a panic could become more likely.

But Kent Kuttner, an economist at Williams College, says last year, there were no appealing options.

KENT KUTTNER: Think of what the alternative would have been if they had said, “Look, we are not going to invest in these institutions because they are not healthy?”

That could have started a run on the banks.

The Treasury Department’s Herb Allison runs the bailout today.

Herb Allison: At the time, we were close to a breakdown of the financial system and close to, perhaps, entering the second great depression.

Officials’ first priority was to do no harm. Still Simon Johnson believes by deceiving the public they did lasting harm to their own credibility.

In Washington, I’m Steve Henn for Marketplace.

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